How Cleantech Startups Can Navigate the ‘Valley of Death’
In the third in our series of articles on Industry 4.0 in the DACH region, we look at the Cleantech sector, its potential and some of the issues it faces.
Industrial and technology giants in Germany, Austria and Switzerland (DACH) are increasingly buying, funding or partnering with connected and intelligent manufacturing technologies and data management companies to ensure they are well-positioned for the Fourth Industrial Revolution, known as Industry 4.0.
Cleantech companies bring tangible benefits to the world, by minimising environmental damage by using advanced technologies. Cleantech is a nascent, but important sector of the Industry 4.0 economy, representing 4% of 2018 M&A deals in the sector.
However, if startups can’t raise the capital needed to bring their concepts to market, the world misses out on those benefits. Over the past fifteen years, there has been a high failure rate for cleantech startups at every stage of development, from formulating a prototype to bringing a product to market. In fact, the failure rate for cleantech is significantly higher than in other industries.
- Between 2006 and 2011, VC firms invested more than $25 billion in cleantech startups. More than half of this investment was lost.
- In the UK in 2011, 87 cleantech startups received more than £200 million from investors. Today, 21% of those companies are no longer in operation.
Hence the cleantech community nicknamed this stage of startup development the ‘Valley of Death,’ because so few companies make it out alive.
Why cleantech often misses out on investment
Compared to other industries where startups can thrive, such as software or fintech, cleantech startups are at a disadvantage when it comes to successfully launching a product.
Cleantech products tend to have a much longer lead time between the ideas stage and the operational stage. VCs, who traditionally expect to see a return on their investment between 3-5 years, will avoid investing in companies which cannot produce a quick return.
Scaling a cleantech startup can require large amounts of capital. Many larger companies have been slow to see the value of cleantech, making them reluctant to take risks and acquire startups. However, as environmental concerns for the planet grow and pressure builds on manufacturing and energy companies to reduce their environmental impact, this is beginning to change.
National governments are backing cleantech
While national governments do not directly invest in individual companies, they are able to create a business environment where cleantech startups have a better chance of crossing the Valley of Death. As a result, governments across the world are boosting their green credentials by backing cleantech.
- In Canada, the government has created tax incentives for companies carrying out R&D in the cleantech sector.
- In the UK, the Mayor Of London set up a cleantech incubator, as an attempt to find answers to London’s pollution, housing and transport issues.
- Germany is leading the world in backing for cleantech, with numerous incentives and subsidies for companies in the sector.
The value of incubators
For larger energy companies, creating an incubator for cleantech startups can be an effective way to demonstrate their environmentally-friendly credentials and highlight their cleantech initiatives. Incubators create a beneficial situation for both sides. Startups receive valuable investment, as well as mentorship and a sense of community. Backers get the benefit of a first look at new ideas, with the opportunity to gain an edge on their competitors if the startups they back become successful.
Companies that have set up incubators for cleantech startups include Shell. Its Shell Foundation Incubator helps develop new clean energy solutions, notably in Asia and Africa.
The largest cleantech incubator in the US is Greentown Labs in Boston, currently home to 90 cleantech startups and employing more than 900 people. Greentown Labs is backed by the French building corporation, Saint-Gobain.
Investors are taking notice
There are signs that larger companies are beginning to take more interest in the cleantech sector, becoming more willing to acquire smaller companies. Investment companies are involving themselves also. In the DACH Region, we have seen three notable examples in the last year.
- The German smart metering company, GreenPocket, raised €3.1 million in a growth funding round led by DEW21. GreenPocket uses AI, machine learning and data science to produce software that helps visualise energy use.
- EnviroChemie, the German water treatment company and part of the investment company Skion’s portfolio, acquired Processing, a similar company based in Sweden, in January 2019.
- SAE-IT, the Cologne-based energy automation tech manufacturer, was acquired by LACROIX Group, as part of its plan to establish itself as a world leader in remote monitoring in the water and energy sectors.
As we move into the future and technology advances, thanks to the help of national governments, incubators and other investors, we hope to see more cleantech startups make it through the Valley of Death. The health of our planet will suffer if we don’t.
‘The sheer range of technologies that power industrial processes, as well as the drive to displace slower-moving legacy players, has led to a sharp increase in startups with truly innovative Industry 4.0 solutions.’